Category: zerohedge

A fascinating, recent report by the Devonshire Research Group, whose recent work on Tesla was featured here one year ago, has moved beyond the micro and tackled on of the most controversial macroeconomic topic possible: what is the true rate of inflation. What it finds is that, like others before it most notably Shadowstats and Chapwood, the accepted definition of inflation, or CPI, is dramatically understated for various reasons, both political and economic.

For those unfamiliar with the “alternative” explanations of inflation measurement, and the implications if CPI is indeed drastically underestimating true inflation, the report is a real eye opener.

Devonshire sets the scene by noting that a wide variety of Price Indices are used to adjust for the effects of Inflation on the economy. These adjustments are widely applied to derive a number of common measures and underlie many critical economic and asset management concepts

• Price Indices: the Consumer Price Index (CPI), the Producer Price Index, the GDP Deflator
• Economic concepts: the Standard of Living, Real Income and Output, Real Economic Growth
• Asset Management concepts: Real Interest Rates, the Risk-Free Rate of Return, the Cost of Capital

These indices and concepts are intimately commingled which is leading to a wide ranging divergence between
reality, published government statistics and the assumptions used for investment decisions.

So how did the US economy end up with the current version of CPI, and specifically why is the widely accepted measurement methodology so wrong? A rising tide of Contrarians and their measurement methodologies is arguing that Inflation is understated by the Price Indices chosen by U.S. government agencies in
numerous ways for complex reasons

• The CPI fails to measure a simple basket of goods that consumers typically purchase “out-of-pocket”
• The weights in the official baskets shift over time in ways that mute the impact of higher priced products
• Price increases attributed to quality improvements (hedonic adjustments) are subjective and overstated
• U.S. government agencies have incentives to downplay CPI increases to lower cost-of-living payments, reduce borrowing costs, and increase apparent real economic growth

The Consensus of Contrarians is growing, shared across several independent critics and supported by concerns among many that official statistics paint on overly optimistic picture of the U.S. economy.

Needless to say, if and to the extent that the Contrarians are correct, the implications for the U.S. economy and for investors are profound

• The Standard of Living may be far more difficult for many Americans to maintain than published statistics suggest
• Real Economic Growth may be flatter or actually negative, suggesting a prolonged 21st century recession, not recovery
• Real Interest Rates, already seen at historic lows, may be strongly negative making Fixed Income returns unattractive
• The Cost of Capital most commonly used to measure investment returns may be far too low

The Consensus of Contrarians suggests that many investors are using incorrect assumptions in their asset allocation models and investment decisions. Capital preservation is compromised, portfolio allocations are distorted and return performance is overstated. Devonshire’s preliminary conclusion: the broader effect on capital markets is likely profound and complicated.

Follow some of the key charts and supporting materials to demonstrate just how off CPI is from its measurement of reality, but first a bit of history: the CPI was originally designed as a tool to adjust wage increases:

The Consumer Price Index was initiated during World War I (which the U.S. joined in 1917) and was later estimated back to 1913. Due to the war, prices were rising rapidly as the government was pouring money into shipbuilding centers, this made it essential to have an index for calculating cost-of-living adjustments for wages.

A brief history of the Consumer Prive Index, and its several relatives:

Eventually, as the US Government developed a stronger interest in inflation, its incentives rose to steer CPI outcomes downward

As noted above, the reason why inflation measurement and reporting has become so controversial is that it is “less a measure of purchasing power (and therefore a financial tool), and increasingly a process of affecting macro-economic policies (and therefore a policy lever).” Just see Venezuela which recently stopped reporting inflation altogether to avoid rising social disorder and anger.

The report goes on to note that while in recent decades, transportation/energy components of prices have seen dramatic fluctuations as a result of oil crises, and subsidy programs, if one treats “transportation” and “other” as exceptional assets, and follow only US gov’t stats, the modern investment age has the feel of stability. In fact, viewed from a longer perspective, the rate of inflation, once volatile from year to year, “flattened” out to the “accepted” 3% / year

Alternatively, Contrarian views of CPI return to its fundamentals: what is the Consumer Price Index:

While the chart above lays out the theoretical divergences, the next chart shows just how vast the differences in CPI are in practical measurement terms between the official CPI calculation, and several alternatives.

Some of the alternative measurements include the Shadowstats Index, introduced in August 2006, the Chapwood Index, whose first publication used the 2012 price inflation, and the Now and Futures CPPI.

Why the emerging disparity? According to Devonshire, numerous arguments claim that the CPI has undergone intentional algorithmic, measurement changes. These are shown below:

The biggest difference in methodology: the  CPI no longer tracks Standard-of-Living, and Out-ofPocket Expenses, yet is still used to benchmark salary increases.

 

Follows the most important chart: the estimation of real annual inflation: according to Devonshire, that number is roughly 8%, nearly three times higher than the “accepted” rate of 3%.

* * *

So why does the government under-represent inflation by such a vast order of magnitude? Simple: if you claim a lower CPI than in practice, you don’t adjust wages upwards as appropriate, so you save money 24

“It is estimated that between 1996 and 2006, this reconfiguration of the CPI saved the US government over $680 billion.” – Chapwood

So putting things in context, as a reminder, total cumulative inflation measuring a “fixed bag” of “standard quality of life” over time – this is the official BLS view.

Meanwhile, the contrarian views of Shadow Stats, CPPI and Chapwood of
total cumulative inflation since 1940 are far more bleak. The chart reveals two things

• The discrepancy suggests a 4-5x less purchasing power today that the “official” view
• And the contrarian views of total cumulative inflation suggest 5-20x less purchasing power now than in 1970

Implications for both the economy and investing are profound, here are just two of them, first, for real GDP: the contrarians suggests the US economy never recovered fully after the dot-com bubble and ’01 recession 30

Meanwhile, investors should ask themselves what is the true “risk-free” rate of return, if inflation adjusted treasuries lose 7-8% purchasing power annually?

Devonshire’s summary conclusions:

• US official CPI calculation is governed, and possibly distorted, by numerous and complex technical decisions
  
• Inflation reporting is less a measure of purchasing power (and therefore a financial tool), and  increasingly a process of affecting macro-economic policies (and therefore a policy lever)
• Real gross domestic product (GDP) measures, yield curves, and treasury issued inflation protected securities (e.g. TIPS), government and union / minimum wages all rely on official US inflation indices that are subject to these distortions
• Most financial, wealth management models rely on a price stability assumption and default to 3% inflation input – what would happen to these models if the true value was closer to 7-11%?
• If we re-compute a purchasing power CPI, de-sensationalize contrarian reporting, and remain disinterested with modern economic policies, we arrive at a 7-9% practical CPI rate over the past decade
• This has profound implications on reported vs. actual standard of living, and might explain the rapid appreciation of American consumer debt, potential reduction in perceived vs. reported quality of life, not to mention unexpected political trends
• Post-1990 inflation of 7-9%, not 3% would also suggest near “bubble-like” conditions exist across many consumer sectors;

Expect low-cost consumer non-durable, consumables, food, housing, clothing, retail to continue to exhibit strong cost
pressure and consolidation incentives – or a macro-recession causing a major “inflation adjustment black swan event”

* * *

Full presentation below:

via http://ift.tt/2phZUcz Tyler Durden

VIa TheAntiMedia.org,

The involvement of the U.S. military in an upcoming multilateral military drill in South America has raised concerns over potential ulterior motives on the part of the U.S.

The drill, dubbed “Operation: America United,” will involve the installation of a temporary military base on the triple border shared by the drill’s other participating nations: Peru, Brazil and Colombia.

According to Theofilo de Oliveira, the top general of the Brazilian Armed Forces, the U.S. military will carry out the drill along with the three Latin American nations this November over a period of ten days. The Brazilian military has asserted that the objective of the exercise is to “ develop greater knowledge, share experiences and develop mutual trust.” Brazilian government officials have strongly denied rumors that the exercise will lead to the establishment of a multinational military base in the Amazon.

The U.S. was invited to participate by Brazil’s unelected president Michel Temer, who has notably boosted Brazilian military spending by 36 percent while simultaneously freezing public spending for two decades through a controversial constitutional amendment.

A friendly relationship with Brazil’s military is key for the U.S.’ strategic interest in South America. As Hector Luis Saint Pierre – coordinator of international security, defense and strategy at the Brazilian Association of International Relations – told the BBC: “Brazil is a strategic partner for the doctrine of the military. If the United States has a good relationship with the Brazilian navy, it is easier to spread its message among the military in the region.”

Pierre pointed out that the drill is of particular interest to the U.S., as it presents an opportunity to focus on the political situation in Venezuela. According to Telesur, President Donald Trump has already met with the presidents of Peru and Colombia to discuss the U.S.’ interest in Venezuela.

As MintPress has previously reported, Venezuela has been the target of ongoing economic warfare as the U.S. continues to disrupt the leftist government first brought to power by the late Hugo Chávez. While Nicolás Maduro – Chávez’s successor – certainly bears some of the blame for Venezuela’s current situation, the U.S. has worked to covertly devastate the Venezuelan economy through a combination of sanctions and oil price manipulation.

With its cash reserves quickly dwindling as a result, Maduro’s embattled government will likely go bankrupt at some point in the next several months, as nearly 70 percent of its remaining reserves must be used to pay back interest on loans from foreign governments. When “Operation: America United” begins, the situation in Venezuela is highly likely to be much more dire and Maduro’s government on the verge of collapse.

In addition, the U.S. has funneled millions to Venezuelan opposition parties since the failed U.S.-led coup against Chávez in 2002, having spent an estimated $50 to $60 million since Chávez’s election on bolstering the country’s right wing. Now, that figure is set to grow substantially as the U.S. Senate is set to vote on a bill that would funnel millions more to the Venezuelan opposition, as well as unnamed non-government organizations.

The bill, titled the “Venezuela Humanitarian Assistance and Defense of Democratic Governance Act,” seeks to offer $10 million in “humanitarian assistance” to Venezuela and another $10 million for “democracy promotion.”

As the bill itself points out, the U.S. is extremely interested in the financial situation in Venezuela, particularly due to U.S. concerns that Russia may gain control of Venezuelan oil infrastructure if the Maduro government ends up declaring bankruptcy.

Within the text of the bill, concerns are raised regarding Venezuelan state-owned oil company PDVSA and its transactions with Rosneft, a Russian state-owned oil company. As TeleSur noted: “fearful that PDVSA could default on its $4- and $5-billion dollar loans from Rosneft, regardless of Venezuela’s steadfast debt repayments, the bill warned that Rosneft could come into control of PDVSA’s U.S. subsidiary, CITGO Petroleum Corporation, which ‘controls critical energy infrastructure in 19 States in the United States.’” Seeing as Russia has already seized Venezuelan oil for unpaid bills despite their political alliance, this fear is not unfounded.

While the U.S. has held drills in South America in the past with little fanfare, the timing and location of the new drill, as well as the nations involved in it, have raised speculation about the U.S.’ current objectives in South America.

Given the U.S. fear of Venezuelan oil becoming the property of the Russian government, as well as the U.S.’ documented history of overthrowing and undermining leftist governments in Venezuela, “Operation: American United” may be less of a drill and more of what its name implies – a way to bring Venezuela, along with other South American nations, back into the fold of U.S. influence.

via http://ift.tt/2q1kmOf Tyler Durden

WTI and RBOB prices slipped lower today after EIA raised its 2017 US crude output forecast (and the dollar rallied) along with Libya production headlines. WTI bounced on a much bigger than expected draw from API (-5.789mm v -2mm exp), but RBOB slipped towards the lows of the day on another unexpectedly large gasoline build.

 

API

• Crude -5.789mm (-2mm exp) – biggest since 2016
• Cushing -133k (+60k exp)
• Gasoline +3.169mm (+350k exp)
• Distillates -1.174mm (-800k exp)

Hope (for the bulls) is that crude oil stocks have peaked (with seasonal declines due) and API appears to confirm that with the 5th weekly draw (and largest since December – if this holds for tomorrow's DOE data). Gasoline saw another big build though…

 

Heading into the API print, WTI drifted up to test $46 and RBOB above $1.49 but the kneejerk reaction was crude bid and gasoline offered…

“The Libyan output increase is putting pressure on the market and there is a lot of new bearish interest coming from funds,” warns Clayton Rogers, an energy derivative broker at SCS Commodities Corp. in Jersey City, N.J..

via http://ift.tt/2phCmEL Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

In this past weekend’s newsletter, I discussed the relatively “weak” breakout of the market to new record highs. To wit:

“Over the last few weeks, I have been discussing the ongoing consolidation process for the S&P 500 from the March highs. (For a review read: “Oversold Bounce Or Return Of The Bull,” and “Return Of The Bull…For Now.”) As the expected rally in stocks, and reversal in bonds, took shape as the S&P 500 was finally able to ratchet a record close at 2399.29. (Read: 10/2016 – “2400 Or Bust”)

 

“With the market on a short-term ‘buy signal,’ deference should be given to the probability of a further market advance heading into May. With earnings season in full swing, there is a very likely probability that stocks can sustain their bullish bias for now.

 

The market did do exactly that this past week, and while hitting a new high, as noted above, it was a ‘weak’ breakout as volume contracted.”

The question for the bulls, of course, is whether the current “breakout” is sustainable, or, is it a “fakeout” that reverses back into the previous trading range? As Steve Reitmeister from Zack’s Research suggested on Monday:

“I would say it all depends on investor confidence that tax breaks are on the way.”

It all hangs on just one issue.

As I have discussed previously, there is a huge risk with respect to the timing and extent of tax reform there will be.

“Given the current problems in Washington D.C. in getting legislative agenda agreed to by Congressional Republicans, delays should be expected.”

“The question, of course, is just how much time the markets will give Washington to make progress on legislative agenda? As noted above, the estimates currently driving stocks were based on tax cuts being brought through to boost bottom line profitability. If those cuts don’t happen soon, earnings disappointments may bite investors.”

It is that potential for disappointment given the overly bullish earnings estimates which poses the greatest risk to investors given the currently elevated levels of valuations.

There is no arguing corporate profitability improved during 2016 as oil prices recovered. The recovery in oil prices specifically helped sectors tied to the commodity such as Energy, Basic Materials, and Industrials.

Currently, while earnings have ticked up modestly with the recovery in oil prices, the price of the S&P 500 has moved substantially more than the earnings recovery would justify.

Furthermore, the recovery in earnings, without the direct bottom line impact from tax cuts, may be fleeting as the dollar remains persistently strong. 

Of course, we already know much of the rise in “profitability,” since the recessionary lows, has come from a variety of cost-cutting measures and accounting gimmicks rather than actual increases in top line revenue. As shown in the chart below, there has been a stunning surge in corporate profitability despite a lack of revenue growth.

Since 2009, the reported earnings per share of corporations has increased by a total of 221%. This is the sharpest post-recession rise in reported EPS in history. However, that sharp increase in earnings did not come from revenue which is reported at the top line of the income statement. Revenue from sales of goods and services has only increased by a marginal 28% during the same period.

In order for profitability to surge, despite rather weak revenue growth, corporations have resorted to four primary weapons: wage reduction, productivity increases, labor suppression and stock buybacks.  The problem is that each of these tools creates a mirage of corporate profitability which masks the real underlying weakness of the overall economic environment. Furthermore, each of the tools used to boost EPS suffer from both being finite in nature and having diminishing rates of return over time.

Of course, given the weakness in revenue growth, it is not surprising the markets are anxiously awaiting “tax cuts” which are a direct injection into bottom line earnings per share.

Importantly, it should be remembered that “tax cuts” will impact “earnings growth” rates for JUST ONE YEAR.

Let me explain:

• Year-1 earnings = $1.00 per share.
• Tax cuts add $0.30 per share in bottom lines earnings.
• Year-2 earnings = $1.30 per share or 30% growth.
• Year-3 earnings growth (assuming no organic growth) = $1.30 per share or 0% growth.

While tax cuts are certainly welcome as a boost to bottom line earnings, it should be remembered earnings growth must be sustained indefinitely to justify valuations at current levels.

Such is unlikely to happen.

With the Senate getting ready to scrap Congresses “AHCA” bill, and write their own plan which will then have to go back to Congress where the debates will begin again, it will likely take MUCH longer to get to tax reform than currently expected.

The problem, technically is that while the stock market is continuing to push higher, the internal strength continues to diminish as shown by both the number of stocks on bullish buy signals and the number trading above their respective 200 day moving averages.

Furthermore, with the volatility level now pressed to its lowest levels since 2007, combined with an extreme overbought condition, a sell signal at a high level, and a large deviation from the 200-dma, the risk of a short to intermediate-term correction has risen markedly.

S&P 3000…Or 1500

It would not surprise me to see the markets break out and attempt to push higher in the current environment. This is particularly the case as the confluence of Central Banks continue to buy assets, $1 Trillion since the beginning of the year, increased leverage and the embedded belief “There Is No Alternative (TINA).”  

It would be quite naive to suggest otherwise.

The chart below is a Fibonacci retracement/extension chart of the S&P 500. I have projected both a 123.6% advance from the 2009 lows as well at a standard 50% retracement using historical weekly price movements.

From the bullish perspective, a run to 3000, after a brief consolidation following an initial surge to 2500, is a distinct possibility. Such an advance is predicated on earnings and economic growth rates accelerating with tax cuts/reform being passed.

However, given the length of the economic and market cycle, there is a significant bear case being built which entails a pullback to 1543. Such a decline, while well within historical norms, would wipe out all gains going back to 2014. 

Just for the mathematically challenged, this is NOT a good risk/reward ratio.

• 3000 – 2399 (as of Monday’s close) =  601 Points Of Potential Reward 
• 2399 – 1543 = -856 Points Of Potential Loss

With a 1.3 to 1 risk/reward ratio, the potential for losses is far more damaging to your long-term investment goals than the gains available from here.

Moreover, the bearish case is also well supported by the technical dynamics of the market going back to the 1920’s, it would be equally naive to suggest that “This Time Is Different (TTID)” and this bull market has entered a new “bull phase.” (The red lines denote levels that have marked previous bull market peaks.)

Of course, as has always been the case, in the short-term it may seem like the current advance will never end.

It will.

And when it does the media will ask first “why no saw it coming.” Then they will ask “why YOU didn’t see it coming when it so obvious.” 

In the end, being right or wrong has no effect on the media as they are not managing money nor or they held responsible for consistently poor advice. But, being right or wrong has a very big effect on you.

Yes, a breakout and a move higher is certainly viable in the current “riskless” environment that is believed to exist currently.

However, without a sharp improvement in the underlying fundamental and economic back drop the risk of failure is rising sharply. Unfortunately, there is little evidence of such a rapid improvement in the making. Either that, or a return to QE by the Fed which would be a likely accommodation to offset a recessionary onset.

In either case, it will likely be a one-way trip higher and it should be realized that such a move would be consistent with the final stages of a market melt-up.

Just as a reminder…“gravity is a bitch.”

via http://ift.tt/2pwose0 Tyler Durden

“Believe me, folks, we do not know it all, and no one should be surprised at that revelation.”
James Bunnell
Hunting Marfa Lights

 

The First ZeroHedge Symposium and Live Fight Club In Marfa, Texas, next month, is going to beat the crap out of Burning Man, Davos, Jackson Hole, Berkshire Hathaway’s Annual Meeting, and Milken’s Global Conference.  

Here, at last, is the schedule:

Thursday, June 15

Everything is bigger in Texas, including the art.  Come a day early to experience some of it.

Purchase tickets in advance: http://ift.tt/1vPeDnM

10:00am – 4:30pm Chinati Foundation – Full Collection Tour

10:30am – 5:00pm Chinati Foundation – Full Collection Tour

11:00am – 1:30pm Chinati Foundation – Selections Tour

11:30am – 2:00pm Chinati Foundation – Selections Tour

 

After dark, go out and try to see The Marfa Lights.  

http://ift.tt/2jVG6It

 

Friday, June 16

Marfa Activities Center
105 N. Mesa St. (btwn W. Texas St. & W. El Paso St.)
Marfa, TX 79843

9:00am Sound check

10:00am ZH Symposium Opening Rant

10:45am Healthcare: hedgeless_horseman,  Negotiating directly with physicians and hospitals

 

1:45pm Real estate: Forrest Noble, The truth and consequences of being a landlord

3:30pm Distilling and brewing: Ned Rutland, One man’s experience with more than 50 years at the still  

 

The University of Texas McDonald Observatory

Purchase tickets in advance: http://ift.tt/2pZIUqt

8:15pm Twilight Program

9:45pm Star Party

 

Saturday, June 17

6:00am Yoga at El Cosmico, under the trees by the community kitchen

 

9:00am Education: Russell Fish, Disintermediated education in your home and community

10:45am Crypto currencies: Ken Griffith, The Death of Banking and the Rise of New Financial Ecosystems – How to Make it Work For You

 

1:45pm Media: Robert Gore, Breaking alternative media’s dependency on the MSM

3:30pm Agriculture: Susanne Friend, Make backyard and commercial aquaponics easy and inexpensive

 

8:00pm Free Live Music at the MAC, Shane Walker and Kelley Mickwee, BYOB and wear you best cowboy boots.   

 

Sunday, June 18

9:00am Personal security: Brian Hoffner, When seconds count, the police are only minutes away

10:45am Project Mayhem

 

This schedule is subject to change.  

The symposium is free and open to the public.  No badges.  No registration.  Entry to the symposium is on a first come, first serve, come and go as you like, and space available basis. If more than the max capacity of 1,000 people show up, we have several options, and will just work it out as we go.  Nobody will be, “reaccomodated.” 

Please donate if you can!  http://ift.tt/2idDhO1

This is a three-day-long Fight Club, and many of you haven’t been training.  Fortunately, we may bring in our own Herman Miller Aeron chair, camp chair, inflatable couch, actual couch, bean bag, Persian rug, chunk of old AstroTurf, coolers, mini bar, picnic, drinks, friends, yoga mat, children, grandparents, dogs*, desk, and trading platform.  There will probably also be a couple of hundred folding chairs available for use. 

*I am told that dogs are allowed, per City Ordinance #95-05 – It shall be unlawful for any owner to fail to exercise proper care, restraint and control of his animals to prevent them from becoming a public nuisance, by running at large, molesting passersby or attacking other animals.  Basically – dogs stay on leashes, and humans pick up after their dogs.

I imagine that there is no smoking in the MAC.  Please, also, go outside to vape.  

Allegedly, we can BBQ in Coffield Park, adjacent to the MAC, but the food and beverages in town are pretty darn good.  Some food trucks may show up.

We are guests of the people and City of Marfa.  Please clean up after yourself.  

All speaker times are West Texas “ish” time, some or all of the speakers may say things you do not agree with, try to get you to change your mind or your life, not show up, show up late, or be under the influence of mind altering substances.  No warranties or guarantees are expressed or implied.  This symposium is nothing more and nothing less than a peaceable assembly of the public.  However…anything can happen…and probably will.  

Don’t DOX people.  Respect others privacy and anonymity, even if our government does not.  If anyone tries to yank off my wig and dark sunglasses, then I am going to be quite upset.

Treat others as you want to be treated.  Look out for yourself.  

We don’t rent pigs!

Peace, prosperity, liberty, and Godspeed!

h_h

via http://ift.tt/2pZtUZm hedgeless_horseman

This…

 

It has now been 12 days in a row that VIX has closed below 11…

 

An all-time record streak of stock market complacency…

 

A chaotic day in VIX trading as every effort was made to defend Dow 21,000… (NOTE the plunge in VIX around 1325ET which appeared to have no news catalyst – just a run to 10.01) – worst day for Dow since April 19th…

 

Late-day weakness in stocks was due to North Korea headlines (Stocks once again rallied off the European close; the tumble around 1325 seemed to have no news catalyst – Fed's Rosengren was speaking around that time – but seemed more technical)… Buy-The-Fucking-North-Korean-Ashes-Dip!!

 

Treasury yields ended the day modestly higher after rising rose once again across the curve in the EUR session…(but note the bid as North Korean headlines hit)

 

With 10Y and 30Y yields back above their 50DMA and 30Y yields at 7-week highs…

 

FX markets were a little chaotic today… AUD dumped overnight, then JPY (after dismal wage data), and then EUR…

 

The Dollar Index surged to 1-month highs – erasing Trump's "dollar too strong" weakness…

 

EURUSD extended its post-Macron losses – to 2-week lows…

 

WTI and RBOB sank on the day – ahead of tonight's API inventories data…

 

And as the dollar surges, gold is offered but Bitcoin is exploding…

 

Once again, spot gold was monkeyhammered lower into the London Fix…

 

Silver is down 15 of the last 16 days (the one up day was an extremely marginal gain)…

 

Oh, and finally, fun-durr-mentals…

via http://ift.tt/2pwA3cN Tyler Durden

In a interview posted moments ago by Sky News, in response to a question “is a sixth nuclear test now imminent”, the answer of the North Korean Ambassador to the UK, Choe Il was “In regards to the sixth nuclear test, I do not know the scheduled time for it, as I am here in the UK, not in my home country. However, I can say that the nuclear test will be conducted at the place and time as decided by our supreme leader, Kim Jong-Un.”

Asked if he is afraid of a possible US military response, the ambassador answers that “we are developing our nuclear strength to respond to that kind of attack by the US. If the US attacks us, our military and people are fully ready to respond to any kind of attack. I do not think the US are considering a military attack against us.” 

Asked what would North Korea’s response be to a preemptive strike, he answer that: “The US cannot attack us first. If the US moves an inch, then we are ready to turn to ashes any available strategic assets of the US.”

He also added that “our nuclear power is our sovereign right”, which technically is true.

In reaction to his comments, stocks, and most FX pairs, have dropped to session lows.

via http://ift.tt/2qo73Z0 Tyler Durden

Following hours of testimony before the Senate Judiciary Committee yesterday regarding her involvement in the General Flynn fiasco as well as her rather unprecedented refusal to defend President Trump’s travel ban, Judicial Watch has filed a FOIA lawsuit against the Department of Justice seeking all of Yates’ emails from her time at the DOJ.  Per Judicial Watch:

Judicial Watch announced today that it has filed a Freedom of Information Act (FOIA) lawsuit against the U.S. Department of Justice for emails of former Acting Attorney General Sally Yates from her government account.  The lawsuit was filed in the U.S. District Court for the District of Columbia (Judicial Watch v. U.S. Department of Justice (No. 1:17-cv-00832)).

 

The suit was filed after the Justice Department failed to respond to a February 1, 2017, FOIA request seeking access to her emails between January 21, 2017, and January 31, 2017.

 

Yates was appointed by President Obama as U.S. Attorney in northern Georgia and was later confirmed as Deputy Attorney General. In January 2017 she became acting Attorney General for President Trump.

 

“Between her involvement in the Russian surveillance scandal and her lawless effort to thwart President Trump’s immigration executive order, Sally Yates’ short tenure as the acting Attorney General was remarkably troubling,” said Judicial Watch President Tom Fitton. “Her email traffic might provide a window into how the anti-Trump ‘deep state’ abused the Justice Department.”

 

As Judicial Watch President Tom Fitton points out, Yates is suspected of potentially playing a role in the unmasking of Flynn in NSA intelligence reports and/or of leaking classified information to the media regarding his alleged ties to Russian officials.  That said, Yates denied all such accounts yesterday under oath:

Former DNI Clapper, former acting AG Yates deny ever being anonymous source in press reports on Trump or associates https://t.co/VO91R4PRlb http://pic.twitter.com/bk2RkRnNgm

— ABC News Politics (@ABCPolitics) May 8, 2017

 

Meanwhile, on the travel ban, Yates testified that she instructed the DOJ to not defend the executive order because it was, in her opinion, “unlawful” and “unconstitutional”. 

Sally Yates said she made determination as acting AG that Pres. Trump’s travel ban was “unlawful”: https://t.co/Okz2bwUl4f http://pic.twitter.com/Pc7uiUTNxt

— CBS News (@CBSNews) May 8, 2017

 

That said, Senator Kennedy quickly took her to task on those claims by asking very simply:  “who appointed you to the United States Supreme Court?”

Senator Kennedy asks Sally Yates, “who appointed you to the United States Supreme Court?” https://t.co/N2XqdigO37 https://t.co/duaEAZYAko

— The Lead CNN (@TheLeadCNN) May 8, 2017

 

Unfortunately, no one managed to ask Yates the most obvious question regarding the travel ban which is, how can it possibly be discriminatory against Muslims if it in no way targets the overwhelming majority of Muslims living outside of the handful of countries banned under Trump’s EO?  As we noted previously, only 12.5% of the world’s Muslims live in the seven countries on Trump’s immigration ban list…

 

But those are just silly facts…

via http://ift.tt/2qPbrjs Tyler Durden

Authored by David Yager via OilPrice.com,

The current discussion about the future of oil is how soon will it be before petroleum becomes a sunset industry. If it isn’t already. Flat or falling demand. Carbon taxes. Electric cars. Renewable energy. Oil has no future. It is only a matter of time, although how much time remains is subject to considerable discussion and debate. Various prognosticators put forth differing view about when world oil demand will peak. Some say as early as 2030, others much later. Nobody says never.

As for actually running out of oil, that issue has run its course. At least for now.

How long the world stays in the oil business is of critical importance. This is illustrated by a Financial Post article April 28 titled, “Next battleground; Enbridge’s aging Great Lakes pipeline stirs new protest in Michigan”. Until recently, the battle against pipelines has been opposing new construction. Now it is existing pipelines. This opens yet another can of worms the industry and regulators have never really grappled with.

Enbridge Line 5 crosses from Wisconsin to Michigan under the Mackinac Straits between Lake Michigan and Lake Huron, a distance of about 4.5 miles. Built in 1953 to the most demanding standards of the day, the Enbridge website says Line 5 transports about 540,000 b/d of Canadian light and synthetic crude and natural gas liquids to markets in Michigan and beyond. What has emerged is concern among campaigning Michigan politicians about the potential for a major spill into the Great Lakes, an event being politically branded as inevitable.

Gretchen Whitmer, a former Michigan senator now campaigning for the Democratic nomination for governor, was quoted in the article as saying, “Common sense dictates that a pipeline which is already 28 percent past its viable life will eventually be decommissioned. Government would be wise to plan for that proactively – before disaster strikes”. Viable life apparently means it was intended to be in service for 50 years and is now on year 64. Not wanting to be left behind on an emerging issue, Michigan Attorney General Bill Schuette, expected to run for governor as a Republican, has also expressed his concerns about the integrity of Line 5.

Replacing this submerged section of the line is reported to cost $2.4 billion. Where it would go and who would pay is not mentioned. Enbridge routinely inspects the line and claims it is in good shape. Unfortunately, the failure of Enbridge Line 6B in 2010 which leaked 20,000 barrels of oil into Michigan’s Kalamazoo River in 2010 is still fresh in peoples’ memories. Having a campaign issue in Michigan which allows politicians to appear concerned by raising alarms about a Canadian company’s assets is a no-lose proposition, at least in the short term.

The subject and cost of maintaining producing, processing and transportation assets doesn’t arise often. While the profile of decommissioning suspended wells has been rising, keeping what still works going is not frequently discussed. But it should be because after they become public, issues like the future safety of Enbridge Line 5 seldom go away.

The ongoing maintenance of producing, processing and transportation assets is the responsibility of the owner, the same as changing the oil, tires and brakes on a car. It is assumed operators will maintain their sets in good working order, and the vast majority do. Maintenance capital budgets are part of every company.

But what happens when cash gets tight? More importantly, what happens if and when the industry starts going out of business as so many hope?

Back in 2008 Matthew R. Simmons, founder of Houston-based oil and gas investment bank Simmons & Company International, gave a slide presentation at the Offshore Technology Conference (OTC) titled “Oil And Gas ‘Rust’: An Evil Worse Than Depletion”. Simmons was often outspoken on oil issues saying things people didn’t want to hear or hadn’t thought about. His 2005 book, “Twilight In The Desert”, was about how Saudi Arabia’s oil production from its gigantic fields was destined to fall.

Both “Matt” Simmons, as he was called by friends and associates, and his firm are no longer with us in original form. Matt passed away in 2010 and his namesake company was acquired by Piper Jaffray Cos. in 2015. But the issue of the deterioration of steel remains.

Simmons went back to the first 100 years of oil when the big fields were on land, in the shallow waters of the Gulf of Mexico or inland bodies of water like Lake Maracaibo in Venezuela. Starting in 1965 the focused shifted from what Simmons called “brown water” to “blue water” further offshore. In response, the OTC was launched in 1969. But by 2008 Simmons said the offshore industry was mature and the North Sea was already “long in the tooth”. This was nine years ago.

Simmons wrote, “The entire oil value chain is built of steel and steel begins to corrode the day it is cast. The oil industry never grasped this profound risk as it built a house for oil out of steel”. The thought was steel would last forever but forever was defined by investors as profits and by governments and regulators as secure and immediate supplies of essential hydrocarbon energy. Simmons noted much of the core assets of North America and the world – pipelines, refineries, storage tanks, wellbores – dated back to the big expansion years of the 1950s and 1960s.

Simmons acknowledged the industry’s determination to prevent or control rust and deterioration. Cathodic protection. Downhole and surface chemical corrosion inhibitors. Smart pigs to inspect pipeline integrity from the inside. Ultrasonic and non-destructive radioactive testing of vessels, pipe and components. Internal and external coatings for everything. Improved metallurgy. Make it last as long as possible for obvious reasons of economic returns and public and worker safety. The original NACE (National Association of Corrosion Engineers) was founded in Houston in 1943 for the sole purpose of addressing all aspects of this subject.

But Simmons started raising alarms about infrastructure nine years ago. He alleged the 20 years following the oil price collapse of the mid-1980s to early this century when prices started rising again were tough on maintenance worldwide. Simmons concluded, “Bottom Line: The Energy Patch Has To Be Rebuilt”. He called this a reconstruction project along the lines of the World War Two war machine or the Marshall Plan to rebuild Europe stating, “If the world wants to continue to use energy, its assets need to be rebuilt. Simple law of nature”. He figured higher prices (which we don’t have) would help pay for it, but that this was a major issue the industry could longer ignore. In 2008.

Which brings us back to today’s reality. The point isn’t to be alarmist. Matt Simmons wasn’t right about Saudi Arabia or peak oil and he may have overstated the problem at the OTC in 2008. But as illustrated by the emerging Enbridge Line 5 issue, the infrastructure upon which the world depends isn’t getting any younger. The vast majority of western operators are very committed to the safety and integrity of their assets. But capital is precious. Where will the money come from?

The pressure from some governments and all regulators and environmental groups is for the industry to pay more for everything. More rules. More obligations. Higher corporate taxes. The highest possible royalties. More development restrictions. Obstruct infrastructure. Carbon taxes. Emission caps. Investment and endowment funds discouraged from owning oil investments. Standard tax depletion and amortization deductions for capital investment for any business called “subsidies” for oil and gas. If the people of the world won’t quit using oil then opponents are using every tool they can think of to starve the industry of capital.

Meanwhile, the industry’s financial commitments to keep aging infrastructure in good working order increase annually because of the age of the assets and despite the good work done by the companies themselves to stay in business in the face of collapsed oil prices and pro-active organizations like NACE. With money from where? Investors and lenders provide capital to grow the business, not sustain it. That’s up to the company.

The fork in the road has two options, neither attractive.

The first is the most likely. Petroleum will continue to be a key element of the world’s energy mix for decades. This means assets must be kept in good working order. Those demanding the industry do more with less better think this through and appreciate not only will the oilpatch require capital to sustain demand-driven growth through reserve replacement, but to keep everything in good working order to operate safely and efficiently. The current direction of taxes and regulations do not anticipate this outcome. The industry must rely on common sense, which outside of industry and capital providers, is in increasingly short supply.

 

The other option is worse. Technology and regulations combine to provide economically viable alternatives to petroleum. Now the industry must face decommissioning liabilities for assets no longer commercially profitable to operate. Except they don’t have the cash. And they won’t be able to get the money from debt or equity investors. Who is going to finance a company or industry going out of business?

The numbers are big. Take one example, Suncor Energy Inc. In its Management, Discussion and Analysis notes for its 2016 audited financial statements, Suncor reported sustaining capital investments primarily for oil sands and refining and marketing of $2.8 billion, nearly 50% of total CAPEX of $6.0 billion. A serious amount of money to sustain $71 billion in book value property, plant and equipment. But of course, Suncor is a serious company with no immediate plans for obsolescence.

But under Contractual Obligations, Commitments, Guarantees and Off-Balance Sheet Arrangements there are other numbers. For decommissioning and restoration costs Suncor estimates $382 million for 2017 and $419 million for 2018. This stays about the same through 2021. But the figure for 2022 and beyond is $9.6 billion and the total is $11.7 billion. This is a company which ended 2016 with $16.1 billion in long-term debt and another $2.1 billion in other liabilities, mostly pensions and post-retirement benefits.

Suncor’s total obligations for debt and decommissioning are approaching $30 billion. That’s a lot of capital to service if the company is going out of business because nobody needs its products. As was proven in the recent Redwater Energy Corp. case where Alberta’s energy regulator tried to insert itself ahead of creditors when the assets were sold – decommissioning obligations before debt repayment – lenders rank ahead of cleanup under current law. So, the Alberta Energy Regulator intends to appeal this decision to the Supreme Court.

There is nothing wrong with Suncor. It is a responsible company. But there is something terribly wrong with how the world regards the future of the oil business.

Whether the world decides to stay in or get out of the oil business; governments, regulators and opponents must learn to read an income statement and balance sheet before dispensing any further advice on how the petroleum industry conducts itself. This industry supplied the energy mankind demanded for generations and paid as much in taxes and royalties as governments could extract. Often governments took too much then had to give some back to keep the lights on. Now it is being asked to do much more with much less and perhaps, if the greens get their way, nothing at all.

Indeed, let’s talk about the future of oil. But from a much different perspective.

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"Iron ore doesn't have good fundamentals," warns one analyst as while the crackdown on leverage in Chinese capital markets (which has tightened liquidity everywhere) is the immediate catalyst, "supply-side pressure is huge as ever, and mills are still seeking to draw down inventories."

As Bloomberg reports, iron ore futures are under pressure again in Asia — signaling a possible return to the $50s for the benchmark spot price — as concern builds about the outlook for rising supply and China’s clampdown on leverage ripples through markets, possibly triggering forced sales. The most-active contract in Dalian lost as much as 1.8 percent, while the SGX AsiaClear futures in Singapore fell 0.9 percent to $59.30 a metric ton. After a five-day losing run, the spot price for 62 percent content is at $60.15 a dry ton, the lowest since October, according to Metal Bulletin Ltd. The commodity has sunk on concern mine supplies will go on rising just as China’s mills enter a weaker period for demand and policy makers in Asia’s top economy rein in leverage. Stockpiles at mainland ports are near a record after robust shipments from Australia and Brazil, with miner BHP Billiton Ltd. citing the inventories as among risk factors that may tug prices lower. Citigroup Inc. has said there may have been forced sales by some traders in China.

Of course, it's not just Iron Ore that is suffering. The last two months have been a bloodbath for industrial metals…

 

As Citi warned over the weekend, "We suspect that a good number of physical traders that are financially leveraged up to five times have been forced to destock due to rising short-term borrowing costs and the recent sharp price corrections."

Citigroup isn’t alone in saying that some traders may be compelled to sell holdings into a falling market as China tightens. Shanghai Cifco Futures Co. said this week signs are emerging that traders are dumping their holdings.

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